Bank of Canada rate pause opens sweet spot for savers: Dale Jackson - BNN Bloomberg

For Canadians investing for retirement, it’s what the Bank of Canada didn’t do this week that really matters. 

On Wednesday the central bank held its benchmark interest rate at a 22-year high of five per cent after an 18-month battle with inflation that took rates up from nearly zero.  

As borrowers struggle with higher debt payments, savers now find themselves nestled in a sweet spot between high yields and tame inflation.

Posted rates on one-year guaranteed investment certificates (GICs), for example, are currently as high as 5.65 per cent. Investors have not seen risk-free returns this high for over two decades. And with signs the Bank of Canada is winning the battle against inflation, less of that yield is being gobbled up by higher living costs.

TIME FOR FIXED INCOME TO SHINE

The combination of higher yields and tame inflation gives retirement investors safer options to compound their savings in bonds and other fixed-income products. 

Fixed income can now significantly add to overall portfolio growth instead of acting as a fruitless hedge against volatile equities. It can also add to the steady flow of income required to live in retirement and replace riskier income alternatives such as stock dividends and real estate investment trusts (REITs).

An effective way to maximize fixed-income returns is to stagger maturities over time to take advantage of the best going yields as often as possible. The most common strategy, known as laddering, ladders maturities over a fixed period of time.

KEEP YOUR FIXED-INCOME LADDER SHORT

Along with its announcement to hold the line on interest rates, the Bank of Canada issued a statement leaving the door open for further hikes in the future if it loses its grip on inflation.

However, most economists see this week’s pause as a sign that the tightening cycle is coming to an end.                                                

The belief that rates will not go higher, or the lack of clarity, is reflected in the inverted yield curve. That means yields on longer-term Government of Canada bonds are lower than shorter maturities. At last check, one-year to three-year maturities are yielding 4.63 per cent, five-year to 10-year maturities are yielding 3.74 per cent, and yields on over-ten-year maturities are 3.56 per cent.  

Paul Gardner, partner and portfolio manager at Toronto based Avenue Investment Management says now is not the time for retirement investors to venture into the long end of the curve.

“Not many strategists or investors are expecting the 10-year and longer to lose control; meaning the curve could re-steepen for the wrong reasons.  There could be supply issues, inflation issues, or credit rating issues for the long end of the yield curve,” he says.

In the meantime, he sees the best fixed-income opportunities in the best corporate bonds.

“I still think that two-year investment grade corporate bonds are the exact place to extract yield,” he says.

SPEAK WITH A QUALIFIED ADVISOR

Maintaining a fixed-income strategy in a broader portfolio is difficult for the average investor. A qualified advisor can help determine how much of your portfolio should be directed toward fixed income based on your growth goals, tolerance for risk and when you will need that cash. 

The last time interest rates and yields were this high, the general rule was to allocate a percentage of your portfolio to fixed-income equal to your age. In other words: if you were 50 years old, half of your portfolio should be in fixed income. It was a way to automatically reduce equity risk as you age.

It’s a general rule that might or might not apply the same to each individual situation, but it’s a start.

Adblock test (Why?)

https://news.google.com/rss/articles/CBMiaGh0dHBzOi8vd3d3LmJubmJsb29tYmVyZy5jYS9iYW5rLW9mLWNhbmFkYS1yYXRlLXBhdXNlLW9wZW5zLXN3ZWV0LXNwb3QtZm9yLXNhdmVycy1kYWxlLWphY2tzb24tMS4xOTY4ODk40gEA?oc=5

2023-09-08 13:37:05Z
2393102110